System of prorated property taxes complicated

Knowing who’s responsible for property taxes in a real estate transaction may seem complicated, but the key is understanding how and when the state collects payments. In Indiana, property taxes are collected in arrears, which means the bill covers the previous year’s tax obligation.

Property taxes are usually paid to the county treasurer in May and November, so taxes paid in November 2017 are actually for July-December 2016, and taxes paid in May 2018 will cover January-June 2017. The taxes paid this year are for the previous year’s ownership of a property.

This schedule is important to understand when making an offer on a property in Indiana, because the buyer will likely ask the seller to pay the taxes for the time in which they owned the property, up to the date of closing. For example, buyers purchasing a home in early 2018, may request the seller to pay all the previous year’s taxes as well as the current year, up to the date of closing. Sometimes a buyer is willing to pay for taxes due for the next installment, but this is in a minority of transactions.

When a seller agrees to pay due property taxes, the amount will be taken from the seller’s proceeds. If there’s a mortgage on the property, the mortgage company will reimburse the seller any unused monies that are in the escrow account. Some loan lenders will allow the tax proration to offset the amount due for the down payment, but not all; this is up to each individual lending company’s guidelines.

Property taxes aren’t the only item often prorated in a real estate transaction, in many cases homeowner association dues (HOA) also can be prorated. Depending upon when HOA fees are due, a seller could receive a credit in unused dues. For example, if dues are $30 a month and the property closes on the 15th, the seller may only be responsible for $15 and could be credited $15 of unused dues. This same idea holds true if dues are paid quarterly or annually.

Samantha Evans is a licensed realtor and broker with Whalen Realty Group, which has more than 10 years of commercial and residential real estate experience. She is a member of MIBOR. She can be reached at Samantha@whalenrealtygroup.com.